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GTAP Resource #6237

"Aggregate Implications of Firm Heterogeneity: A Nonparametric Analysis of Monopolistic Competition Trade Models"
by Arkolakis, Konstantinos, Rodrigo Adao and Sharat Ganapati

We measure the role of firm heterogeneity in counterfactual predictions of monopolistic competition trade models without parametric restrictions on the distribution of
firm fundamentals. We show that two bilateral elasticity functions are sufficient to
nonparametrically compute the counterfactual aggregate impact of trade shocks, and
recover changes in economic fundamentals from observed data. These functions are
identified from two semiparametric gravity equations governing the impact of bilateral
trade costs on the extensive and intensive margins of firm-level exports. Applying our
methodology, we estimate elasticity functions that imply an impact of trade costs on
trade flows that falls when more firms serve a market because of smaller extensive
margin responses. Compared to a baseline where elasticities are constant, firm heterogeneity amplifies both the gains from trade in countries with more exporter firms, and
the welfare gains of European market integration in 2003-2012.

Resource Details (Export Citation) GTAP Keywords
Category: 2021 Conference Paper
Status: Not published
By/In: Presented during the 24th Annual Conference on Global Economic Analysis (Virtual Conference)
Date: 2020
Created: Arkolakis, K. (4/12/2021)
Updated: Arkolakis, K. (4/12/2021)
Visits: 283
- Calibration and parameter estimation
- Not Applicable

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